Philanthropy’s Biggest Opportunity (Part I)

One of the best parts of my job at Philanthropedia is that I get to spend a lot of my time thinking about how to make philanthropy better. And when I say better, I am not talking about incremental improvements (10% or 20% better) but rather disruptive improvements (10x or 100x better), which Philanthropedia is focused on.

With this four-part blog post, I would like to tell you about one such disruptive improvement to philanthropy: creating an impact-based social capital market. My goal is to define this concept, provide a common framework and terminology that we can use to discuss it, and ultimately inspire as many of you as possible to join me in making this vision a reality.

What is an Impact-Based Social Capital Market?

An impact-based social capital market concept has several important characteristics:

Donors reward nonprofits first and foremost based on the impact of their programs. Surprisingly, my own research reveals that there is a shortage of good definitions of impact, so let me provide the definition that we use at Philanthropedia for reference: a high-impact nonprofit is a nonprofit which produces lasting improvements that address the core problems in a particular social cause.

It is worth adding that the focus on impact does not exclude other relevant organizational characteristics (e.g. leadership, staff, marketing, operations, or finances). It also does not exclude using emotional appeal to inspire donors to give. Instead, philanthropists need to focus on impact first because without it nothing else really matters. As we say at Philanthropedia, donors participating in the impact-based social capital market will choose causes with their hearts and organizations with their minds.

The market needs to be focused on organizations (rather than individual projects or informal initiatives). Despite the emotional appeal of individual projects, only organizations can develop the capacity to tackle the big and important problems we face in a meaningful way. Otherwise, we are doomed to continue making tiny progress on disconnected fronts as opposed to tackling core issues in a way that can really make a lasting and substantial difference.

The market needs to engage individual donors, because they provide the bulk of philanthropic capital today: more than 80% of total charitable giving. I will come back to this point below when I explain why an impact-based social capital market can dramatically improve philanthropy.

Finally, a market cannot exist without a marketplace where supply and demand meet. The Internet presents a tremendous opportunity to build such a platform because it is both ubiquitous and very low cost.

At this point, most people imagine a simple graph to summarize the concept like this:

Why Does an Impact-Based Social Capital Market Matter?

To understand why an impact-based social capital market has the potential to improve philanthropy dramatically, we need to recall that more than 80% of all charitable contributions come from individuals ($229 billion out of $285 billion in 2008). And yet individual donors today are bombarded by cleverly crafted marketing messages that omit the most important thing in the nonprofit world: what impact the organization is having. And if donors actually decide to seek extra information to make a more informed decision, they are mostly limited to looking up irrelevant financial ratios and basic 990 information. Therefore, not only are philanthropists wasting billions of dollars funding nonprofits without real impact, but we are also not rewarding good organizations properly, which further diminishes philanthropic effectiveness.

One way to look at this status quo is with desperation at the magnitude of the challenge that many others have attempted to tackle before. However, I choose to see the inefficiency of today’s philanthropy as an amazing opportunity to improve the sector. As a matter of fact, I believe that solving this inefficiency is the only way for philanthropy to remain relevant in the 21st century and become an effective tool for solving social issues.

So why has such an impact-based social capital market failed to materialize so far? And what can we do to make it a reality in the next 2-5 years? I will answer these questions in my next post.